Month: July 2018

Large MLP Global Partners (NYSE:GLP) has priced a new fixed-to-floating rate issue with an initial coupon of 9.75%—WOW. After 8/15/2023 the issue will trade with a coupon of 3 month Libor plus a spread of 6.774%. This coupon is much higher than we thought it would be and one wonders why it is this high.

Regardless we will do some more due diligence and consider a purchase of this issue.

Thus far no OTC Grey market has been announced.

The issue is cumulative and the distributions will NOT be qualified distributions. A K-1 will be issued for this issue at tax time.

According to the Spark Energy (NASDAQ:SPKE) website the company should announce earnings late Thursday or early Friday and I wanted to make sure investors were positioned correctly for the release in case of ‘surprises’.

Recall that Spark announced earnings which were not well received by investors last quarter and shares of the Spark Energy 8.75% fixed to floating rate preferred shares fell sharply as shown on the chart below.

The company has given no forewarning of poor earnings and has declared both preferred and common dividends for next quarter already on 7/19.

We do note that the common shares fell by 8% today although the preferred shares closed at $23.77–up 7 cents.

As we had previously conveyed we had owned a very large position in the preferred shares (NASDAQ:SPKEP) which we cut back to normal weighting when we were able to exit some shares with a 3-4% profit.

In our opinion investors should not be overweight these preferreds going into the earnings as any upside to preferred price is likely extremely limited–but downside could be great if there are negative surprises.

Last week the only ‘excitement’ in the bond markets was when a ‘rumor’ of Japanese changes to their quantitative easing program spooked investors sending the yield on the U.S. 10 year treasury up 6-8 basis points to the 2.98% area. Simply put if Japanese interest rates rise investors will buy more bonds in Japan and cut back on U.S. purchases.

Well the governor of the Bank of Japan has pretty much put that rumor to rest today announcing that the QE program will go on for the next year.

Of course Japan has a huge problem in that they can’t juice the economy no matter what they try—the rapidly aging population of Japan simply won’t do what the government wants–spend. Of course this is a cultural issue that has been in play for many years. So with no inflation and thus no rising wages it is pretty hard to get the economy moving.

As all readers know we love term preferreds from CEFs –in particular those from Kayne Anderson MLP Investment Fund (NYSE:KYN) and Tortoise MLP Fund (NYSE:NTG) which have issued solidly investment grade senior securities (preferred stock and all debt are senior securities in the closed end fund world) over the years.

Over time the term preferreds from these issuers have ‘matured’ with their mandatory redemption feature leaving us with only 1 lonely issue with a mandatory redemption on 4/15/2020. The remaining issue is the Kayne Anderson MLP Investment Fund 3.50% Series F Mandatory Redemption Preferred Shares (NYSE:KYN-F). The issue became optionally redeemable in 2016. Dividends are qualified and are cumulative. The company is required to have an asset coverage ratio on the senior securities (debt and preferreds) of 200% and most recently the coverage ratio was 294%.

Why would you as an investor be interested in a piddling 3.50% coupon? It is simply the safety the issue provides as it pays a very reliable 3.50% in monthly payments. Call it a cash proxy if you would like.

KYN-F is now selling right around $25 for the first time in over 2 years–in fact today a large sell order dropped the price to $24.76 before it recovered to close at $25.02.

The price of this preferred should be pegged right at $25 for the next 20 months–no matter the level of interest rates or the strength of the economy.

The price action of the issue has been as it would be if the issue was going to be redeemed–and maybe it will be, but there is little–if any–chance of financial loss if an investor buys shares in the $25 to $25.05 area as the monthly dividend is 7.3 cents/share and holding them all the way to redemption (whenever it shall come) will provide a modest–but ultra safe return. Any price below $25/share should be bought if possible by ultra conservative investors and those looking for a super safe home for cash potentially for the next 20 months.

We should note that Kayne Anderson is trying to merge the Kayne Anderson MLP Fund with the Kayne Anderson Energy Development Fund and the recent price action of the term preferred may be because of this potential merger.

Disclosure–we are overweight a bunch of this with a holding of 1942 shares.

So we got through the last week without much excitement at all–the most excitement being provided by rumors of Bank of Japan tweaking their QE program which sent the 10 year up by 6-8 basis points. GDP Friday at 4.1% was apparently about what was expected as it didn’t do much of anything to the stock or bond markets. The 10 year treasury traded in a range of 2 basis points on Friday–as we expected there were excuses for traders to credit “one offs” for the strong growth numbers and thus the strong number was somewhat ignored. Apparently strong soybean shipments to China accounted for near 1% of growth getting ahead of the Chinese tariffs–I guess if that is the case it would signal a shortfall next quarter (or so it would seem).

This week we have Pending Home Sales on Monday–month over month is expected to be up a tiny bit and year over year is expected to be down 6%. Tuesday we have Personal Income released–it is expected at .4% month over month and the Case/Shiller Home Price Index which is expected to be up 6.8% year over year–of course we know it will be plenty high, but our bet it is at/near the peak as potential buyers are running out of juice to fuel these increases–not enough income growth. On Wednesday we have the ISM (Institute of Supply Management) Prices Paid which will give us an indication of potential inflation moving through the manufacturing sector. Also we have the Purchasing Manager Index being released. On Thursday we have Factory Orders being released and on Friday we have all the Employment Reports being released. Consensus is looking for 195,000 new jobs being created with an unemployment rate of 3.9%. Year over year hourly earnings are expected to be up 2.7%–which is part of the reason housing is softening as those in the middle and lower income simple don’t have the money to get into houses.

We don’t think that any economic reports will have the ability to move markets this week (much) until the employment reports on Friday–and even those numbers likely won’t move markets for longer than 6 hours or so–since that seems to be how long it will take before a new topic will capture the moment.

The Fed Balance Sheet fell by a fairly large $14 billion last week which is an above average “run-off” of government bonds and mortgages. This serves to help keep interest rates from falling much from current.

Last week we had 2 new income issues priced. 1st off regional banker KeyCorp priced an investment grade issue (per Moodys–1 notch below IG from S&P) with a coupon of 5.65%. Now trading on the OTC Grey market with a ticker of KYYCP. Shares are trading quite weakly at $24.72 as we thought it might.

AT&T sold an issue of baby bonds with a coupon of 5.625%–with a maturity date out in 2067. The new issue sent the older TBB issue which carries a 5.35% coupon tumbling.

The ticker for the new issue has not yet been announced.

The average share price of a $25 preferred fell last week by 8 cents to $25.17–we didn’t analyze this move lower, but it is possible that ex-dividend dates played a role. There are 161 issues now trading below $25/share.

Lastly we had 2 calls by Bank of America of preferreds. The BML-I issue, left over from the Merrill Lynch acquisition, with a coupon of 6.375% has been called and the BAC-D issue with a coupon of 6.20% was also called. Also Wells Fargo has finally called the WFC-J issue which carried a 8% coupon–this issue was left over from the Wachovia merger and was 1st redeemable 12/2017.

Well the time has arrived for the release of the only economic number of the week that could have moved the markets–but it has now been talked about so much that it is likely to be a minor blip, at the most, on stock and bond markets.

Predictions have ranged from growth of 3.5% to over 5%. Almost everyone who predicts these things says this is a ‘one off’ show of strength.

Seems to us that only a very large miss from the expected range is likely to be meaningful–a 2% growth rate or a 6% rate for instance would probably move markets but something in the 3.5% to 5% range will be a big yawn.

The 10 year is trading at 2.98% this morning so a number in the high end of the range could push rates over 3%, but since every prediction includes the statement that this is a one off we think the likelihood of a big move is quite remote at this time.

Business Development Company (BDC) Saratoga Investment (NYSE:SAR) has a newer investor presentation which was recently released.

We highlight this presentation because Saratoga has had baby bonds outstanding which many income investors have had in their portfolio. Currently they have 1 issue outstanding with a coupon of 6.75% and a maturity date in 2023–ticker symbol is SAB and it can be found here. This issue has an early redemption starting in December, 2019.

Finally after more than 25 days of being stuck in the 2.80s the 10 year treasury note finally jumped today to close at 2.96%. It only took unconfirmed reports that the BOJ (Bank of Japan) would consider toning down the Quantitative Easing program in that country.

Of course the QE program in Japan makes the Fed QE program look like child’s play. The BOJ owns near 100% of their GDP in government and corporate bonds, ETFs, REITS and other sorts of assets. If the FED balance sheet looked like the BOJ balance sheet it would have near $16 trillion in assets instead of $4.3 trillion.

Of course comparing the central banks of Japan with the U.S. is an exercise in silliness. Their 10 year bond hit a high of .09% today—and in the past the BOJ would begin asset purchases if the 10 year hit .10 or .11%. This is really silliness since there is little inflation in Japan and the ability of the BOJ to stimulate economic growth is near non existent in a county where the median age is near 47—savers not spenders.

Regardless of the minimal level of interest rates in Japan any increase in Japanese interest rates is likely to drive U.S. rates higher as the Japanese investor is more likely to desire to buy Japanese bonds instead of U.S. bonds.

Since this entire ‘story’ was from ‘unnamed sources’ we will watch in the days ahead to see if any official news comes from the BOJ.

KeyCorp has priced a new fixed rate preferred issue with a somewhat miserly coupon of 5.65%.

The new issue will be non-cumulative, but dividends will be qualified for preferential tax treatment. The issue will be optionally redeemable in 12/2023.

The new issue permanent ticker symbol is KEY-J when big board trading begins. In the meantime the issue will trade on the OTC Grey Market under the temporary ticker symbol of KYYCP.

My best guess is that investors will be able to buy the issue on the OTC market for $24.85-$24.90. It is likely the issue will trade in the $25.25-$25.50 area once the issue trades on the NYSE for a month.

KeyCorp is a large regional bank with assets of over $137 billion. They are headquartered in Cleveland and serve a 15 state area.

Banking company Keycorp (NYSE:KEY) will be selling a new fixed rate preferred issue. Of course being a banking company the new issue will be non-cumulative. The new ticker is KEY-J. The OTC Grey Market ticker will be KYYCP.

Details of the new issue have not yet been announced.

The company has a fixed-to-floating rate issue outstanding right now that has a coupon of 6.125% and is not redeemable until 2026. These shares are trading very strongly in the $26.88 area.

The ‘dog days of summer’ continue with the DJIA trading in a range of just over 200 points last week. With super earnings being reported by many companies in the 2nd quarter there have been individual movers, but overall equity markets are pretty quiet. Even quieter than the equity markets has been the 10 year treasury market with the yield on this note trading in a range of 2.83% to 2.90% with a weekly close of 2.89%. It has now been 2 months since the 10 year treasury closed at 3% or higher.

For the coming week we have a limited number of major economic reports being released. Today we have Existing Home Sales and on Wednesday we have New Home Sales. As usual neither of these reports will have any impact on markets, but they could be interesting as last week we had Housing Starts and Building Permits reported and both were weak numbers. On Thursday we have Durable Goods Orders being reported. Friday we have the 1 potentially market moving report being released and that is the 1st read on 2nd quarter GDP. This is forecast at a very strong 4%, although the Atlanta Fed GDPNow forecast is at 4.5%. Seems to us that if these numbers are attained they may well move the 10 year treasury somewhat higher–in a more traditional/normalized economy the movement would be large–in this global economy buyers continue to love the 10 year yield so the affect is likely to be muted.

The Fed Balance Sheet remained dead flat last week with no runoff nor purchases to speak of–less than a billion.

Last week Bank of America (NYSE:BAC) sold a new fixed rate non cumulative preferred issue and we believe they will use the proceeds to call one of their older higher coupon issues–most likely BML-I which is a 6.375% issue which is from the Merrill Lynch acquisition and has been redeemable since 2010. The other older issue is the 6.20% issue BAC-D which became redeemable in 2011. The new issue is large enough to call 1, but not both issues. The new issue is trading on the OTC Greg Market under ticker BKAML and closed Friday at $25.07.

The new BAC issue has a coupon of 5.875% and will have a permanent ticker of BAC-K. It is not of interest to us, but for conservative investors it would be a reasonable holding.

Energy Transfer Partners (NYSE:ETP) sold a new fixed-to-floating rate preferred last week with an initial coupon of 7.625%. As one reader noted they felt as though they were ‘thrown’ under the bus as the MLP had just sold a 7.375% fixed-to-floating rate preferred in April and the older issue fell from $25.60 to $24.80 on the news of the new issue.

The new issue is trading on the OTC Grey Market under the ticker ETPZF and closed Friday at $25.00. We did take a small position at $24.80 in personal accounts and the Enhanced High Yield Portfolio.

The average preferred share closed at $25.25 last week which was a couple pennies higher than the week before. There are 149 issues trading at $25.00 or below which is 4 issues more than the week before.

As noted by some of our readers Bank of America (NYSE:BAC) has sold a new con-cumulative preferred issue with a fixed rate coupon of 5.875%.

As is usual with Bank of America (or any of the massive banks) the issue is large with 34,000,000 shares being offered.

The terms are the normal banking terms–non-cumulative, qualified dividends and quality payments. The issue begins the optional redemption period in July, 2023.

The issue is trading on the OTC Grey Market under the temporary ticker of BKAML and was recently priced at $25.10

The company has stated they may call other preferred issues with the proceeds and this issue is large enough to call either the BML-I issue which carries a 6.375% coupon or the BAC-D issue which has a 6.20% coupon. Both are now redeemable and trading at slight premiums to call prices ($25 plus accrued dividends).